Monday, December 26, 2016

Here are my ten questions for 2017. I'll follow up with some thoughts on each of these questions.

The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2017, and - when there are surprises - to adjust my thinking.

1) US Policy: There is significant uncertainty as to fiscal and regulatory policy in 2017. This is probably the biggest risk for the US economy this coming year. I assume some sort of tax cuts will be passed, possibly some additional infrastructure spending, and possibly some deregulation.

These is the potential for significant policy mistakes - like defaulting on the debt (seems unlikely) - or the start of a trade war. Usually at this point in the transition process, there is a pretty clear understanding of the new administration's policy proposals, but not this time. I'll write much more about this issue.

2) Economic growth: Heading into 2017, most analysts are pretty sanguine and expecting some pickup in growth due to tax cuts and infrastructure spending. How much will the economy grow in 2017?

3) Employment: Through November, the economy has added almost 2,000,000 jobs this year, or 180,000 per month. As expected, this was down from the 230 thousand per month in 2015. Will job creation in 2017 be as strong as in 2016? Or will job creation be even stronger, like in 2014 or 2015? Or will job creation slow further in 2017?

4) Unemployment Rate: The unemployment rate was at 4.6% in November, down 0.4 percentage points year-over-year. Currently the FOMC is forecasting the unemployment rate will be in the 4.5% to 4.6% range in Q4 2017. What will the unemployment rate be in December 2017?

5) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed's 2% target. Will core inflation rate rise in 2017? Will too much inflation be a concern in 2017?

6) Monetary Policy: The Fed raised rates this month, and now the question is how much will the Fed raise rates in 2017? The market is pricing in three 25 bps rate hikes in 2017, and most analysts expect two to three hikes in 2017. Will the Fed raise rates in 2017, and if so, by how much?

7) Real Wage Growth: Wage growth picked up in 2016. How much will wages increase in 2017?

8) Residential Investment: Residential investment (RI) was sluggish in 2016, although new home sales were up solidly. Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI increase in 2017? How about housing starts and new home sales in 2017?

9) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up about 5% to 6% or so in 2016. What will happen with house prices in 2017?